California Residency Tax Planning
What’s Happening?
The digital economy has allowed increasing numbers of nonresidents to work remotely for California firms without becoming California residents, and even without paying California income taxes (see my article Nonresidents Working Remotely for California Businesses ). At the same time, more and more nonresidents find themselves being offered lucrative temporary employment in California. This is particularly true for software developers or other information technology and e-commerce specialists who are in high demand by California’s thriving internet firms to complete a particular project. But it’s also true for medical professionals, management strategists, actors, professional athletes, artists, corporate trainers, even part-time teachers in a specialty field.
What all these professionals have in common is project work. The employment in California is temporary in that it involves completing a particular project or term of service. It isn’t permanent. It isn’t open-ended. Of course, temporary is a relative term. Some projects may only last a few months; others may require more than a year to complete. The issue confronting nonresidents working temporarily in California is whether they will be taxed only on their California-source income or become a resident in the eyes of California’s tax enforcement authority, the Franchise Tax Board. To control that, nonresidents working in California should have a plan.
Why It Matters?
At first blush, it might not seem to matter whether a nonresident working on a temporary basis in California is deemed a resident or not. The wages or 1099 (independent contractor) income received while working in California is usually taxable by California regardless of residency status. That’s inescapable because the work is performed in California in the case of W-2 salary. In the case of 1099 income, if the work is in California, that usually means the customer is in the state (the FTB uses “where the benefit is received” for sourcing independent contractor revenue). Accordingly, if all the income the worker receives during that tax year comes from the project, it won’t usually make any difference what his residency status is.
However, if the taxpayer has other sources of income, it can make a big difference. California only taxes nonresidents on income sourced to California. But it imposes an income tax on residents with respect to all their income, from whatever source. And the top rate is 13.3% (14.3% if the income is W-2 sourced to California). Continue reading